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Lesser of Two Evils: Credit Card or Bank Loan?

June 23rd, 2011 at 09:17 pm



The original post can be found here: Debt Free

I recently spoke to a young coupleÖ weíll call them Jim and Judy. Jim and Judy were both working, they had their $1,000 beginner emergency fund, they were working their debt snowball and were well on their way to financial freedom.

All of a sudden, life smacked them over the head. They got hit with some unexpected legal fees for $3,000 AND then a tax bill for over $2,000. They definitely donít have enough cash to cover over $5,000 of unexpected expense.

So their question was, ďShould we pay these bills using a credit card or a personal loan from the bank?Ē

As you know, I donít believe in borrowing money, if at all possible. So my first recommendation was to try to work out a payment plan for each of these bills, pick up extra hours or projects at work, start selling stuff and doing anything else that would keep them from having to borrow the money.

But it got me thinkingÖin a situation where all these possibilities have been exhausted, and there still isnít enough money to pay the bills, which option would I recommend? Which one is the lesser of two evils?

Credit Card or Bank Loan?


Letís take a look at the Proís and Conís of each:


Credit Card Proís

- You donít necessarily need great (or even good) credit to qualify. Heck, even childrenís dead hamsters get credit card applications.

- Some credit cards offer very low, or even 0%, introductory rates. So you could pay little to no interest.

- Itís very easy to apply for a credit card.


Credit Card Conís

- With credit cards, itís very easy to get stuck in the ďminimum payment trap,Ē keeping you in debt longer and paying more interest.

- If you still have a balance at the end of the intro period you will be subject to the cardís much higher standard rate. In fact, some cards will back-charge you for interest on the entire original balance.
Credit card interest rates are subject to change at any time with very little notice.

- You now have a credit card at your disposal, increasing your risk of getting into further debt.


Bank Loan Proís

- Bank loans have a fixed repayment period, forcing you to pay the loan off within a specified timeframe.
These loans usually carry a fixed interest rate and monthly payment.

- A personal loan will usually offer a lower interest rate than the standard rate on a credit card.

- You borrow a set amount of money. This means you canít borrow more the way you could with a credit card.


Bank Loan Conís

- These loans are risk-based, meaning you will usually need good credit and a low debt-to-income ratio in order to qualify.

- Often times, these loans arenít advertised. You will need to call or visit a local bank or credit union to apply.


The Verdict

Let me reiterate, I do NOT believe in borrowing money, if at all possible. But in the very rare case that it canít be avoided, I would highly recommend a Bank Loan over a Credit Card, any day of the week! The main reason is that credit cards allow you to make minimum monthly payments that are designed to keep you in debt for the rest of your life! If you must borrow, go with a Bank Loan and add the balance to your debt snowball. Then, attack your debts with such relentless force that everyone around you thinks you have literally lost your mind.

This is NOT a game. This is your life, your well-being, your future and your childrenís future we are talking about here. Life happens and we canít stop it. But you can prepare for it.

Step 1. Save up $1,000 as a beginner Emergency Fund.

Step 2. Work the Debt Snowball and become Debt Free as fast as possible.

Step 3. Save up 3-6 months of your living expenses as an Emergency Fund.

If you follow these steps, you will never find yourself in a desperate position with debt as your only option. And you will never, ever, ever have to borrow money again! THATíS TRUE FREEDOM!!!


Yours In Freedom,

Clint



Join the conversationÖwhich option would you have chosen in this situation? Leave your comments below!



7 Responses to “Lesser of Two Evils: Credit Card or Bank Loan?”

  1. Petunia 100 Says:

    Jim and Judy have already borrowed. They borrowed taxes they owed to the IRS or other government tax agency, and they borrowed the cost of legal services rendered from their attorney. They are already in debt. The taxing authority will most certainly charge interest daily on their debt, the attorney likely will too. If they can't pay in full, they should finance their debt in whatever way costs them the least.

  2. clintdavis Says:

    Hi Petunia, you are absolutely right. They have already "borrowed" the money by not preparing for these expenses. They have acknowledged their mistakes and are now taking responsibility for and control of their finances. That's why they hired a financial coach. In this real-life situation, they were able to qualify for a short term personal loan from their bank. They got a decent interest rate and are working hard on their debt snowball. Everyone makes financial mistakes...but it's also everyone's responsibility to own up to them and take the necessary steps to fix them. It's exciting to see Jim and Judy doing that!

    Thanks so much for the reply!

  3. Jerry Says:

    I agree totally that a bank loan is far preferable to a credit card, because it leads to less financial stress over the long run (if they manage it right). It is far better to have the insurance of a low financing rate, which usually comes through the bank... and truth be told, I kind of hate credit card companies in general. Smile I hope it works out well for them!
    Jerry

  4. clintdavis Says:

    Thanks for the comment Jerry. I kind of hate credit card companies too. Have you watched the documentary "Maxed Out" ? It'll kind of make you feel sick to see how sleazy they really are.

    Thanks again!
    Clint

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